Online Investing Hacks

Bank on Banks

Although you’ve probably used banking products and services such as checking accounts, savings accounts, and loans, do you know how banks make money and how to translate that into investment opportunity?

The money business doesn’t work quite like other businesses. Unlike other companies that sell products or services, banks buy and sell money. A dollar is a dollar, so how do banks make a profit? By charging a higher interest rate for the money they loan out than they pay for the money that comes in as deposits and by charging fees for the money-related services they offer. Because of this difference in business model, banks use a few financial measures you won’t see for other companies. However, taking the extra steps to study banks is worth your while—financial stocks can grow quite well and are a great way to diversify your portfolio.

Banks come in several flavors, each with its own unique blend of pros and cons:

Money-center banks

These banks borrow from and lend to governments, large corporations, and other banks. They offer no consumer banking functions. Money-center banks can deliver more consistent earnings than other types of banks due to their large bases of operations. However, their sheer size can limit how quickly they grow. They are also vulnerable to losses from big corporate and international loans.

Investment banks

These are commercial banks that specialize in lending money to corporations for investment activities, such as initial public offerings and ...